Revenue sharing must protect all interests

MLB's
plan for sharing revenues will soon be unveiled as a tool to improve
competitive balance. SportsBusiness Journal presented an interesting
plan earlier this year pegged to future media income. Bob Costas offered
another version in "Fair Ball."

Owners, players, fans and taxpayers all have much at stake. A broader
approach — call it Plan B — may be needed that addresses
the interests of all stakeholders (see chart).

The existing state of affairs has brought players the "good old days." In 1999,
13.9 percent of MLB's 892 players had annual contracts in excess of $4 million.
Costas' plan promised higher overall salary levels — a necessary element to
secure the union's support — but as with the SBJ plan, it may have ignored
the interests of high-revenue teams and taxpayers.

Asking big-revenue teams to share their wealth requires more than a call for
competitive balance to protect small market teams. The Montreal Expos, for example,
received $27 million from the shared revenue pool in each of the past two years.
If minor league operations cost approximately $9 million, the Expos received $18
million to attract and retain better players. In 1998 the Expos' payroll was $8.5
million; in 1999 it was $16.2 million.

Thus, MLB was essentially paying the entire cost of fielding a team in Montreal.
Teams that receive substantial revenue-sharing funds should be expected to do more
than simply use other people's money to field a team.

Market size is a determining factor in terms of the existing inequities because
it is associated with local broadcast income and ballpark-related income. Teams
in smaller markets should receive larger shares from national revenues to correct
these problems.

Beginning in 2005, MLB will earn approximately $720 million a year from its national
broadcast contracts and Internet properties. A new revenue-sharing plan should target
these funds and be based on market size but include performance requirements, guarantees
for the players and some relief for taxpayers.

To protect the interests of players, the plan ensures that no less than $1.8
billion would be spent on salaries. That requires a target of $60 million per team
on player salaries, but no team could spend more than $95 million. At this level,
the players' share of total revenues exceeds current amounts.

Under this Plan B, each team's share of the revenue pool is determined by a modified
"sum of the years" approach. There are currently 30 teams in MLB and the sum of
the number of the teams (30+29+28 ...) is 465. The team with the smallest market
would receive 30/465 or 6.5 percent of the pooled revenue. The team from the next
smallest market would receive 29/465, and so on.

If the shared revenue pool were $720 million and no adjustments were made, the
Cincinnati Reds would receive $46.5 million, the Milwaukee Brewers $44.9 million,
and so on. Every team would be assured some money, including New York City's Yankees
and Mets, who would receive $2.3 million.

Every dollar received from the shared revenue pool must be matched by a dollar
from the local team and spent for player salaries, up to a maximum of $35 million
in shared dollars, giving a payroll of $70 million. Teams receiving more than $35
million in revenue-sharing funds must use the extra dollars to offset the cost of
new ballparks, with the public sector receiving half the excess to reduce the burden
on taxpayers. If the Expos received $38 million but decided to have a team payroll
of $32 million ($16 million from the team matched by $16 million from revenue sharing),
$22 million would be available to reduce the cost of a stadium; half of that, $11
million, would go to reduce taxpayers' payments.

A revenue-sharing system that can provide more than $40 million for some teams
while others receive less than $3 million must have safeguards to ensure the funds
make teams more competitive. Two measures were created to ensure that the funds
are used for the purpose they were intended and to protect the interests of the
larger market teams.

Each team must have a "fan penetration index" equal to MLB's average.
In 1999 MLB had a penetration index of .54, meaning that teams sold
one ticket for about every two people in each market area. If a team
misses the league average, this would be evidence of a lack of marketing
or of fielding a team that is noncompetitive.

To prevent a franchise from simply lowering ticket prices to meet its
penetration rate requirements, a team would need to have an average
ticket price equal to the average of all MLB teams.

Any team that fell short of either requirement would forfeit a portion of its
share from the revenue pool. Lost funds would be equally distributed to all 30 teams
with the requirement that 50 percent be dedicated to players' salaries.

How would this plan work in practice? The accompanying table uses data from the
1999 season to calculate shares. Several small market teams would now have a substantial
pool of dollars to attract and retain the best players. The Reds, Brewers, Pirates,
Padres and Cardinals would each receive in excess of $36 million. The Expos would
receive far less, $27.2 million, but they could raise their share by increasing
their penetration rate.

It is time for MLB to implement a revenue-sharing program to protect the interests
of fans, players, owners and taxpayers. When the ump yells "Play Ball," let's provide
a basis for each team to really "play ball."

Mark Rosentraub is professor and associate dean of the School of Public and
Environmental Affairs at Indiana University.